Profit Margin Scheme under VAT in UAE

Tally Solutions | Updated on: December 6, 2021

• What is Profit Margin Scheme?
• Is the Profit Margin Scheme available for the supply of goods and services?
• Which goods can be supplied under the Profit Margin Scheme under VAT in UAE?
• Why has this Scheme been given?
• What happens if the goods are purchased from a VAT registered person?
• What are the conditions for the supply of goods under the Profit Margin Scheme?
• Is it required to notify the FTA regarding the supply of goods under the Profit Margin Scheme?

The Profit Margin Scheme is an important scheme for the calculation of VAT in UAE. This scheme is applicable to certain specified goods and there are certain conditions to be fulfilled to be able to supply goods under the Profit Margin Scheme. Let us understand the Profit Margin Scheme in this article.

What is Profit Margin Scheme?

The Profit Margin Scheme is a scheme whereby a Taxable Person has an option to calculate Tax on the profit margin earned on a supply, instead of the sale value.

Is the Profit Margin Scheme available for the supply of goods and services?

The Profit Margin Scheme is available only on supply of certain specified goods, not services.

Which goods can be supplied under the Profit Margin Scheme under VAT in UAE?

The goods which can be supplied under the Profit Margin Scheme are:

• Second-hand goods, i.e. tangible moveable property which is suitable for further use as it is, or after repair
• Antiques, i.e. goods which are over 50 years old
• Collectors’ items, i.e. stamps, coins, and currency

Why has this Scheme been given?

The goods on which the Profit Margin Scheme is applicable are broadly second-hand goods on which VAT has already been levied at the time of its first supply. When these goods are purchased by registered second-hand goods dealers usually from unregistered consumers, VAT is not levied and hence, no input tax is recoverable by the second-hand goods dealer on the purchase. Hence, when these goods are sold by second-hand goods dealers, it would not be right for the dealer to have to pay VAT on the full sale value, as it would lead to double taxation on the goods. As a result, for such supplies, a provision to pay VAT only on the profit earned on the supply has been given.

What happens if the goods are purchased from a VAT registered person?

There can be scenarios where registered second-hand goods dealers purchase used goods from registered persons. In this case, the supplier will levy VAT on the supply. If the second-hand goods dealer is opting for the margin scheme for supply of these used goods, the dealer is not eligible to recover this input tax paid. If the second-hand goods dealer is not opting for the margin scheme, the dealer is eligible to recover the input tax paid.

What are the conditions for the supply of goods under the Profit Margin Scheme?

The supply of goods under the Profit Margin Scheme should fulfill either of the following conditions:

• They should be purchased from either:
  • A person who is not registered under VAT or
  • A Taxable Person who supplied the goods under the Profit Margin Scheme

OR

• Input tax should not be recovered on the purchase of the goods

Hence, in a nutshell, it is important that input tax should not be recovered on the goods supplied under the Profit Margin Scheme.

Is it required to notify the FTA regarding the supply of goods under the Profit Margin Scheme?

No, a person supplying goods under the Profit Margin Scheme is not required to notify the FTA regarding the same. For the transactions which meet the criteria of the Profit Margin Scheme, the person can levy VAT accordingly and report such sales in the regular VAT return.

In our next article, we will learn how VAT is calculated under the Profit Margin Scheme and a comparison between VAT calculation under normal circumstances and under the Profit Margin Scheme.